Understanding Why Debt Occurs and What to Do About The Financial Slump

by Hank Coleman

Regardless of our best intentions, some of us still manage to incur expenses that could have been avoided with a little more due diligence. Therefore, understanding why we can fall into a financial slump can keep us from becoming prey to the causes of debt and help us maintain a debt-free lifestyle.

Most people start accumulating debt because:

  • They encounter a situation that they had not anticipated, such as unemployment, divorce, or medical bills
  • Have a problem with controlling their spending
  • Have not built up any good habits with respect to saving
  • Do not have enough knowledge with respect to credit or financial concerns.

Therefore, knowing why debt can become a problem is essential in knowing what methods you need to take in order to overcome and remediate any issues along these lines. In order to reduce debt then, you should…

Create A Budget. Dave Ramsey is famous for saying that every single dollar that you earn should have a “name” or a line in the budget each and every month. You should know where every one of your dollar bills is going in written monthly budget.

Be A Better Shopper. Make prudent decisions when you shop. For example, when you are thinking about buying an item, such as a computer, you may want to consider choosing the less expensive brand if it has the same basic features as a more expensive model. Use the money you save and put it into the bank.

Have An Umbrella. Save money so you have the funds for any unanticipated expenditures. You should make it a goal to stash, at the minimum, three months of expenses away into an emergency fund.

Pay Off Your Credit Cards Monthly. My wife and I use our American Express charge card to pay for almost all of our monthly expenses, and then we pay the balance off every month…no exceptions! We use this method as a budgeting tool and to keep our spending in check. We never right checks anymore and hardly carry any cash.

Understand The Fine Print. Learn all you can about any loan you take out, especially the amount of interest assigned to the loan and any penalties assessed for early payment or late fees. When it comes to debt, people seem to get into the most trouble when they acquire credit cards or take out a loan. Therefore, it is essential to know what your financial responsibilities will be if you’re considering taking out a loan or making an application for any kind of credit. You typically must pay compound interest on a loan or credit amount. Therefore, keep in mind that interest is not only charged on the monthly amount but also on the outstanding balance as well. As a result, you can quickly assume more debt than you can handle if you let your payments slide in any way. The ultimate goal of our financial lives is to eventually earn interest from investments instead of paying interest on loans to someone else.

A credit card can be a privilege, but it can also be viewed as something to avoid entirely. Just think – each time that you use that card means you are possibly paying a financial institution about 18% or more annually on everything you buy. Do you really want to pay, say, 18% interest on a bag of chips or a cup of coffee?

Therefore, to reduce debt, it is often best to:

  • Pay cash
  • Set a limit on the number of times you can use your credit card on a monthly basis
  • Limit the number of credit cards in your possession
  • Select credit cards with the lowest of interest rates
  • Make it a rule not to apply for a credit card just to receive, say, a reduced rate on purchases or a complimentary gift
  • Pay your bills in a timely manner to reduce the amount you pay in interest and avoid any late charges

Obtain as much knowledge as you can by reading blogs such as Own The Dollar, others like it, and other websites related to personal finance and financial management. It is your money. Part of the privilege of working is making your money work for you, and not someone else. Own your dollar…don’t let your dollars own you!

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{ 3 comments… read them below or add one }

Personal finance May 27, 2010 at 7:18 am

Budget helps to determine current and to some extent future financial position. planning should be in way where all the factors have to be taken in to consideration. You never know what emergencies can creep up any time. Striking a proper balance between spending’s and income is very important.

Belmont Thornton May 29, 2010 at 6:03 am

The points mentioned are actually the reason behind heavy debt. You need to have a control on your expenses and a tracking mechanism behind it to reduce the incidence of debt and attain good financial health.

Sukhdeepak June 2, 2010 at 1:54 am

You have mentioned real reasons for debt. We need to control our expenditure and must try to save something from our income in order to meet any unanticipated mis happening.
Trend of saving is very common in developing countries like India that’s why India was least affected country by recession.

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